Neil Shearing’s Internet Marketing Strategies

—> In this post the examples are fictitious. This information may not be construed as advice of any kind. If you plan to do anything similar to what I mention in this post, it is entirely at your risk. Consult an expert in financial advice if you require advice. Only you know your personal circumstances. Do your own calculations for risk vs reward and decide for yourself if you can use the banks free money to help you get out of debt.

In my crusade to wipe out debt (and I most certainly DO include mortgage debt in my thinking, not just “unsecured debt” such as credit cards, loans and overdrafts), I’ve been using a tactic to spend the bank’s money to save me cash.

One day, out of the blue, a credit card company sent me checks which I could use at a balance transfer rate of 0%. I hadn’t used the card before, so I guess they wanted to motivate me to use it. Zero percent APR is, effectively, free money. So I looked for the catch… they can’t really be giving me free money, can they? It turns out that the “catch” is the fee levied on balance transfers. In my case it was 2% of the amount transferred, or a £35 maximum. As I wanted to transfer a large amount, the £35 seemed like a good deal. The 0% APR offer lasted for six months, so I had to be sure I could pay off the debt after 6 months, or face hefty interest bills.

So I went close to the limit of the unused card by transferring money from it to my mortgage. I incurred a £35 one-off fee, but the money was saved me much more than that each month on my mortgage. After six months I paid off half the card and transferred the rest of the balance to a new 0% card. OK, so the transfer incurred another fee of £50, but this time the 0% APR rate is for 12 months.

Some things to note:

1: Pay off the card before the 0% APR rate expires or you’ll most likely get hit with interest at a much higher rate than your mortgage. It’s best to know you can pay off the card before starting the balance transfer process. You can leave the money you will use to pay off the card in a high-interest savings account or, if you have a flexible mortgage, withdraw the credit card cash when the time comes to pay off the credit card.

2: Watch out for cards that don’t limit the 2% transfer fee. If the 2% is unlimited, moving a lot of money could generate a hefty fee thereby making the whole process pointless.

3: Do the calculations in advance. How much will the fee be? How much interest will be saved per month. How many months does the interest-free offer last? How much will be saved in total?

4: Earned interest or saved interest? Some people take this “free money” and put it in a high interest account. I guess that’s feasible, but the interest you earn will be taxed. It may be better to use the free money to pay off a debt. For example, earning £100 in a high interest account may generate £80 after tax. Whereas putting the money on a mortgage and thereby avoiding £100 in mortgage payments, effectively earns £100.

5: Covering yourself. Any insurance policies for mortgage repayments may not cover credit card repayments should anything go horribly wrong.  

As long as you know what you’re doing, and you keep some careful records, this is a great way to use free money from the banks to temporarily pay off a chunk of your mortgage.

This entry was posted on Monday, July 31st, 2006 at 11:06 am and is filed under Current posts, Personal, Getting out of debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.